Grupo Herdez SAB de CV

BMV:HERDEZ

Earnings Call Analysis

Grupo Herdez Concludes 2023 with Striking Sales and Profits Amidst Economic Tailwinds

As we review Grupo Herdez's performance in the last quarter and the entirety of 2023, the company displayed a robust trend, reaching unparalleled sales and profit levels. The sales were remarkably propelled by a 10% jump in the fourth quarter alone, summing up to MXN 9.8 billion. When we look at the annual scope, numbers are even more staggering, with an overall increase of 14.4%, leading to consolidated sales of MXN 36.2 billion. This surge can be principally attributed to strategic pricing maneuvers implemented over the prior twelve months and sustained volume.

Distinct Segments Demonstrate Diverse Growth Patterns

Segment-wise, Preserves shone brightly with a 6.3% increase in quarterly sales, reaching an impressive MXN 7.9 billion. The annual narrative echoes a similar success story, charting a 13.7% uplift in sales amounting to MXN 28.8 billion, ushered by strong demand in mayo, tomato puree, moles, and other categories. Moreover, Grupo Herdez's market dominion in mayo soared to a 67.2% volume share. The Impulse segment saw a more pronounced growth spurt with a 21% rise in quarterly sales, hitting the MXN 1 billion mark, and an annual uptick of 19.4%. Encouragingly, Helados Nestlé played a pivotal role in stimulating this advance, notably surpassing 2019 sales figures in three out of four brands. Exports, too, experienced an impressive ascent, amplifying by 39.2% in quarterly sales due to boosted canned vegetables and sauces volume.

Gross Margin and SG&A: A Mixed Financial Picture

Gross margin for the quarter achieved a commendable 40.4%, a growth of 3.9 percentage points from the previous year, thanks mainly to descending soybean oil costs and a robust Mexican peso. However, it remained shy of the long-term goal of 40%. On the operational front, SG&A expenses ticked upwards by 2.9 percentage points quarterly, representing 24.3% of net sales. When we aggregate the year's expenses, they made up 25.1% of net sales, a year-over-year increase that can be linked to heightened investments in marketing to stoke demand.

Profitability Metrics Evidencing Healthy Upward Traces

Moving the lens toward profitability, both EBIT and EBITDA for the quarter enjoyed substantial elevations of 19.8% and 18.9% respectively, while the full year saw these figures swell by impressive margins of 31.1% and 25.7%. Consequently, net income for the quarter nudged higher by 6.3%, landing at MXN 997 million, and for the year, an extraordinary leap of 46.8%, culminating in MXN 3.2 billion in consolidated net income. The majority of this growth spurt is well-placed on the laurels of a solid performance exhibited by MegaMex, contributing MXN 753 million and reinforced gross margin propulsion.

Sound Financial Structure with a Keen Eye on Sustainability

Grupo Herdez boasts a strong financial stance with MXN 2 billion in available cash and a consolidated debt profile of MXN 9.5 billion as the year wrapped. The company's commitment to optimizing working capital led to an inflow of MXN 414 million in free cash flow for the quarter and a sizable MXN 3.2 billion for the year, enabling debt reduction and shareholder returns through dividends and share buybacks. Additionally, the company's sustainable finance mission made strides with reduced water consumption and the launch of a sustainability-aligned supply chain finance initiative.

2024 Outlook: A Conservative Yet Positive Horizon

Gazing into 2024, Grupo Herdez sets a cautiously optimistic tone. Capitalizing on the consumer confidence buoyed by macroeconomic factors, the company forecasts Impulse sales growth in the low teens and consistent high teen growth for exports. Preserves are likely to stabilize, translating into a low single-digit increase in consolidated net sales. Gross margins across segments are projected to sustain their 2023 posture, with EBIT expected to grow in all divisions. For majority net income, a high single-digit percentage rise is anticipated, although somewhat tempered by the normalizing growth of MegaMex.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, everyone, and welcome to Grupo Herdez Fourth Quarter and Annual 2023 Earnings Conference Call. Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding the forward-looking statements.

At this time, I would like to turn the call over to Andrea Amozurrutia, Head of Finance and Sustainability. Please go ahead.

[Andrea Casillas, executive]

Thank you, Ariel. Good morning, everyone. Thank you for joining us on today's call. We are delighted to present our fourth quarter and full year 2023 results which highlights the strength of our brands and the focus our operational discipline. We reached record levels of sales and profits despite challenges such as shifting consumption patterns. And as the rest of the industry, we benefited from a downward trend in inflation, higher disposable incomes, the decline in commodities and a strong Mexican peso.

As outlined in our earnings release, our consolidated net sales increased by 10% in the last quarter of the year, reaching MXN 9.8 billion with full year sales climbing 14.4% to MXN 36.2 billion. This growth was mainly fueled by the positive effect of pricing actions taken over the past 12 months, while volumes remained steady.

In the Preserves segment, quarterly net sales reached MXN 7.9 billion, a 6.3% increase from the last period of last year. Full year sales rose by 13.7% to MXN 28.8 billion, driven by strong growth in categories like mayo, tomato puree, moles, spices and pasta. We reached a record high market share in mayo, which is 67.2% in volume and food service sales surpassed MXN 2 billion. It is worth highlighting that recently McCormick was recognized as one of the top 10 brands in Mexico by Kantar.

In the Impulse segment, quarterly sales surged by 21% to MXN 1 billion with accumulated sales reaching MXN 4.7 billion, up 19.4%. Helados Nestlé played a significant role in driving this growth, particularly through the traditional channel, while in retail, we continue to witness a recovery in store traffic. Notably, this year, we surpassed 2019 net sales level in 3 out of 4 brands in retail.

In the export segment, quarterly net sales surged by 39.2% to MXN 869 million, driven primarily by increased sales of canned vegetables, which doubled its volume while Peppers and homestyle salsa experienced growth of more than 25%. Additionally, the mayonnaise category saw a strong growth attributed to the catch-up of sales delayed in the third quarter and increased sales of the new twin-pack presentation of our main -- mayonnaise [indiscernible] which allows us to access new regions. Full year net sales reached MXN 2.7 billion, marking a 13.5% increase over 2022.

Our consolidated gross margin for the quarter reached 40.4% up 3.9 percentage points from the previous year. This is mainly the result of lower prices of soybean oil, combined with the strength of the peso. Preserves and Impulse segment experienced margin increased of 5 and 3 percentage points to 41.2% and 59.2%, respectively. Export gross margin remained steady at 9.8.

For the full year, gross margin grew 38.9%, the highest level in the past 5 years, but is still below our long-term target of 40%.

SG&A expenses for the quarter were 24.3% of net sales, up 2.9 percentage points year-over-year. Accumulated SG&A expenses were 25.1% of net sales, up 1.4 percentage points from 2022, primarily driven by increased investments in the market to similar demand.

Moving to EBIT and EBITDA. In the quarter, we reached MXN 1.6 billion and MXN 2 billion, respectively, which represented increases of 19.8% and 18.9%. For the full year, EBIT and EBITDA reached MXN 5 billion and MXN 6.2 billion, 31.1% and 25.7% higher than 2022, while margins expanded to 13.9% and 17.2%. Consolidated net income for the quarter reached MXN 997 million, increasing 6.3% year-over-year. For the full year, it surged by 46.8% to MXN 3.2 billion, achieving a consolidated net margin of 9.2 This growth is primarily attributed to the good performance of MegaMex, which contributed MXN 753 million to the net earnings and the strong gross margin performance.

Our financial structure remains robust with available cash at MXN 2 billion as of December 31, and consolidated debt of MXN 9.5 billion. Our efforts to improve working capital discussed over the entire year, generated MXN 414 million in free cash flow in the quarter and MXN 3.2 billion for the full year, enable us to pay down MXN 1 billion in debt, MXN 400 million in dividends and share buybacks of MXN 223 million.

In terms of our commitment to propel sustainable finance initiatives, we are delighted to share that at the end of 2023, we reduced our water consumption per ton produced to [ 2.5 ] cubic meters aligned with our commitment in the sustainability new bond issued in 2022. Also, we have just launched a supply chain finance program with [ BDAA ], aligned with our sustainability goals. Suppliers now connect with a better interest rate. After an independent evaluation, we have aligned strategies towards sustainability goals.

With that, I will now turn the call over to Gerardo.

[Gerardo Miguel, executive]

Thank you, Andrea. Mexico finished 2023 with the highest consumer confidence levels since the beginning of 2019, aided by lower inflation, higher disposable income plus some government spending for social programs that is likely to remain this year. These factors will relieve some pressure from consumers during the first half of this year. With this in mind, we present our guidance for 2024 year results, but with a credit...

After our outstanding results over the last 2 years, 2024 will be less dynamic. Impulse sales are forecasted to grow in the low teens, while exports are anticipated to maintain its growth trends in the high teens, as Andrea mentioned. Preserves are expected to remain flattish. Consequently, consolidated net sales and projected -- are projected to increase in the low single digits.

Gross margins for the Preserves segment and Impulse are expected to maintain the 2023 levels while exports should return to the low teens. As a result, EBIT is expected to grow across segments with Preserves showing steady performance aligned with EBITDA. Majority net income is forecasted to increase in the high single-digit percentage range primarily due to stabilization of MegaMex growth.

CapEx for the year will be approximately MXN 1 billion to MXN 1.3 billion, allocated towards maintenance, carryover of the capacity increased, projects on volume and ERP migration.

We're now ready to take your questions. Ariel, please proceed.

[Operator]

[Operator Instructions] Our first question comes from Luis Yance of Santander.

[Luis Yance, analyst]

Congrats on the results. My first question is regarding the guidance you just mentioned. In particular for Preserves, that kind of flattish top line and if I understood correctly, also flat margins relative to 2023. Could you elaborate a little bit further on that view? Is it because you're seeing already some sluggishness in consumer demand that is making you cautious? Or is it just you're coming off a great year, therefore, it's prudent to expect a bit of a slowdown. Just trying to understand the flat volume. But also on the margin side, I mean, I would assume you're still having some tailwinds from the lower commodity prices, et cetera. So I would have thought that perhaps we could have seen a bit more margin expansion. So if you could elaborate on that, that will be great.

[Gerardo Miguel, executive]

Right. Thank you, Luis. In terms of the market dynamics, the market is moving from flattish. When we talk about flattish, we're talking about flattish is 0, 1%, 2% volume growth. So we believe that is going to be the dynamic going forward. Remember that last year, in the second quarter, volumes dropped from a category perspective. Then they started to move a little bit upward. And now we're talking about low single digits, flattish 1%, 2%. The majority of our categories are experiencing these dynamics, okay?

Now, having said that, in terms of inflation/pricing strategies, there's one this year. We just adjusted some SKUs that need some adjustments, but we will not see and we're not forecasting any pricing actions. So that will make all the growth in sales is going to come from volume, okay?

Now, this year, we are going to invest more in the market in order to incentivize demand. So we feel confident about these actions but there's still 4 Preserves are going to be in the low single digit. In terms of gross margin, we expect gross margin to maintain to increase slightly in Preserves. And because we are seeing some inputs -- some raw material inputs -- are increasing due -- not from generalized inflation, but from specific situations related to weather. So we are anticipating a little bit of friction in some raw materials that are grown in Mexico, vegetable related, some packaging materials are still in the last cycle of inflation, even though soft commodities have come down significantly. So that will be on the margin side.

And in terms of EBIT, we're also seeing some low single-digit growth. That's for Preserves. And in Impulse, we're seeing some traction in traffic in our stores. So also all the growth that we are expecting from double -- low double digits is coming from traffic and from [indiscernible] So I don't know if that answers your question.

[Luis Yance, analyst]

Yes, that's great. And I guess a follow-up on the margin side. And if you could give us a bit of an update in terms of your hedges, both on ForEx and some of the raw materials like soybeans that you do hedge. How do they look like for this year and perhaps next year, how do they compare versus the realized levels you had in 2022? And given the further decline we see, are you actively in the market perhaps now even hedging towards 2025? Or you're still focusing on the hedges for 2024?

[Gerardo Miguel, executive]

Well, no, I would say that we have been actively managing those risks for 2024. We are almost done for 2024. And to start adding for 2025, I think we need a little bit more information on the planting intentions in the U.S. that are going to come in the second quarter of the year. So our hedging strategy has been very flexible. So our inputs are going to be slightly lower than 2023. But again, we're going to invest in some demand creation. And that's going to help us to have a better gross margin than last year, but it's not going to grow as big as 2023 or 2024. So we're almost done. I think that there's going to be some risks that the market is not expecting for the second half of this year and probably 2025 that makes hedging very expensive. So we need to finish 2024, and we're almost there.

[Luis Yance, analyst]

Okay. And how about the ForEx hedging, also you're almost done for 2024 or that's just for the soybeans part?

[Gerardo Miguel, executive]

Can you repeat that, please?

[Luis Yance, analyst]

Yes. I was wondering if the fact that you said that you're almost done for 2024, does that relate to hedges to the raw materials or also to hedges to the currency?

[Gerardo Miguel, executive]

Both. Both because our raw material is [ bringing ] foreign currencies, so we hedge both.

[Luis Yance, analyst]

Okay. Great. And my last question, could you give us some color on how you see MegaMex business evolving? I mean we have very good -- you had a very good year, in general terms, especially on margins. I mean -- but we did see some weakness in the fourth quarter. I mean you kind of said it in the press release, some marketing investments in salsas and some pressures on the slowdown in Guacamole in food services. But as we go into 2024, how should we think about this business, both in terms of growth and also margins?

[Gerardo Miguel, executive]

Right. Okay. So let's start first saying that the U.S. market is very intense in price elasticity. So from a general standpoint, and that's not only related to MegaMex, and you can read all the public -- CPG's companies report. And we have seen -- and across the board, lower volumes due to downsizing or lower consumption, et cetera. So that is still going on. So MegaMex has experienced lower volumes as any CPG in the United States. And we are also planning to invest in demand creation, in terms of -- that would be in terms of sales.

And in terms of gross margin, the bad news is that in fourth quarter, MegaMex had a very difficult comps from 2022. That's when the price of avocado [ returned ] and comps are not helpful. But we really don't put a lot of focus on comps. We're more focusing on the future. And we think that this year is going to take a little bit more time to gain some volume traction. At the end no pricing, there's -- also from a dollar standpoint, MegaMex is facing higher costs because of -- the peso has strengthened. And we believe that we can achieve the same profitability than last year. And then for the whole year, not for quarters. I also believe that we are making a lot of progress in the [ medium ]. So this year, we're going to see a turnaround in the medium and that will help drive all the profitability in the company. I can [indiscernible] is still the only salsa that is growing in the category and is expanding, portfolio is expanding more flavors in salsa, and the brand has a lot of motion going forward.

[Operator]

Our next question comes from Felipe Ucros of Scotiabank.

[Felipe Ucros Nunez, analyst]

Congrats on the results. Two questions on my side. So the first one is on exports. Just wondering if you could give us some more details about the expansion that you're doing with wholesalers. And whether this type of growth that we've posted the last 2 quarters in the 50% range in U.S. dollars. Is something that will continue until you complete a full year of those changes? Or if those very high rates were related to building new inventory in this expansion? And then also, if I can have a follow-up on M&A. It's been a few years of operations under the belt on some of the M&As and new distribution contracts that you have signed. So just wondering if you can comment on the performance of those transactions and how your opinion of those acquisitions compares to what you envisioned when you did the acquisitions? And obviously, there's been a lot of them, but if you could comment on the largest ones, that would be great.

[Gerardo Miguel, executive]

Okay. Thank you, Felipe. In terms of exports, this is new distribution what we did in the club's channel. So we are -- when we do new distribution, you have this bump in terms of sales. And then we have to focus on repeat rates. So even though we are expecting a double-digit growth in exports due to these listings, we will wait a little bit in order to keep increasing distribution and see how this goes. So the message here in exports is that the brands are increasing distribution with new channels. And particularly, this is a truth with McCormick Mayonesa.

In terms of -- I can add that our strategy of taking early to the world, we are still adding some new countries, in a very small scale because nothing -- there's no market in the world that compares to the United States that we are doing increase -- we are entering some countries in Latin America, in South America. We are increasing our distribution in the U.K. with the Herdez brand. So we started with a big retailer, climate hours, and now we are increasing our distribution. So slowly, you will see that our international expansion is gaining traction, but obviously, it's a small fraction compared to the U.S.

And the other question was about M&A, right? In terms of M&A, when we're talking about distribution, that is not M&A per se, it's just increasing our operating leverage. We are very interested in exploring those opportunities, but we're not actively searching for more distributions in Mexico. In terms of M&A, we have seen some opportunities, but we have been very, very strict with our capital allocation as you've been aware, and we have mentioned in our reports. In the last 3 years, we focused on repurchasing our own shares. And after interest rates spiked, we lower our debt. So I think that, that discipline will continue for the near future. I think our plate in terms of the Impulse category is full, and we need to focus on execution before you think about inorganic growth.

[Felipe Ucros Nunez, analyst]

Right, Gerardo, but just going back to my question, I was wondering if you could comment about the M&A that you have already done in the last few years. Anything that you can give us on how those businesses are performing compared to what you envisioned when you did those acquisitions, rather than future...

[Gerardo Miguel, executive]

Can you be more specific because our communication is not great. You're talking about the expectation of our latest M&A like the -- maybe [ Italian ] business?

[Felipe Ucros Nunez, analyst]

So I'm talking -- and I'm sorry that it's not very clear, but -- you've done some M&A here in the last 5 years, a number of them. Just wondering how those are performing compared to your expectations? Any comments you can give us there on the largest acquisitions that you have done.

[Gerardo Miguel, executive]

Well, I think that history can give us the answer. I think that development of Impulse has not been as expected that -- that's in our reports. I think that for several reasons that we have mentioned in the past. But what I can tell you is that and honestly is on great path. It took us about 3 years to put some operating discipline in the business. It took us a few years to change the portfolio. It took us 3 years to segment -- to do some segmentation on channels. So I think that, that is still very good. And I think that the future for that business looks great. It have been gaining market share, and we have a portfolio to increase penetration and profitability.

In terms of retail business, I think that the curve gets very steep. I think that the brands that we bought are great, and we are seeing some traction right now in terms of ticket. And it's going to take a little bit more time than we expected, but these brands are crossing channels. Probably this year, you're going to see in the market some new products in Chinese. And you're going to see some new formats that by the way are already in the market, but we don't want to -- be a little bit more time to see the performance.

So -- and in terms of Mediterranean, I think that it's -- this year also, you're going to see some products across brands and across geographies, involving our latest acquisition in DIPs. So probably I extended a little bit, but we feel comfortable on what's coming through these M&A opportunities. And it has taken us a little bit more than expected.

[Operator]

[Operator Instructions] Our next question comes from Juan Ponce of Bradesco BBI.

[Juan Ponce, analyst]

You mentioned earlier that wages -- higher wages have helped demand and are going to help demand in the first half of this year. But how much do you -- of an impact do you see on margins specifically from the higher wages that we're seeing in Mexico?

[Gerardo Miguel, executive]

Right, right, right. That's a very good question, Juan. The big impact that we see is in Impulse because Impulse has -- and probably not Impulse generally, just retail because salaries are very close to those minimum wages. So the impact comes there, but it's for all the industry, okay? And you have a lot of rotation in that business as any retailer. So even though the impact is high, we're working more on training the people in order to have more productivity in those sales. So it's going -- it is for the last 4 years. It has been -- the impact has been in retail. In Preserves, there's no impact.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Gerardo Canavati for any closing remarks.

[Gerardo Miguel, executive]

Okay. Thank you, Ariel. So thank you for participating in our call. If you have any questions, don't hesitate to contact us, and we'll see you in our next meeting. Thank you, everyone.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.